{"id":431186,"date":"2025-12-15T23:14:52","date_gmt":"2025-12-15T23:14:52","guid":{"rendered":"https:\/\/seedlegals.com\/resources\/non-diluting-shares-explained-and-why-you-should-never-ever-issue-them-to-anyone\/"},"modified":"2025-12-15T23:14:52","modified_gmt":"2025-12-16T00:14:52","slug":"non-diluting-shares-explained","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/us\/resources\/non-diluting-shares-explained\/","title":{"rendered":"Non-diluting shares explained, and why you should never ever issue them to anyone"},"content":{"rendered":"","protected":false},"excerpt":{"rendered":"<p>Occasionally I come across founders calling us at SeedLegals saying they have an investor or advisor asking for non-diluting shares, and how can they set that up. Now, you should never ever give non-diluting shares to anyone. It&#8217;s a disaster that can kill your company by making it uninvestable<\/p>\n","protected":false},"author":3,"featured_media":431199,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[146,157],"tags":[],"event_tags":[],"class_list":["post-431186","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-funding-guides-us","category-videos"],"acf":{"related_posts":false,"post_content_width":"default","post_content":[{"acf_fc_layout":"text","text":"<p data-start=\"70\" data-end=\"225\">Occasionally, founders come to us at SeedLegals saying an investor or advisor has asked for non-diluting shares \u2014 and they want to know how to set that up.<\/p>\n<p data-start=\"227\" data-end=\"365\">You should <strong>never<\/strong> give non-diluting shares to anyone. It\u2019s a huge red flag and can seriously damage your company by making it uninvestable.<\/p>\n<p data-start=\"367\" data-end=\"573\" data-is-last-node=\"\" data-is-only-node=\"\">If an investor, co-founder, employee, or advisor ever asks for non-diluting equity, send them this video. It explains how non-diluting shares actually work, and why the right answer is simple: just say no.<\/p>\n<p>&nbsp;<\/p>\n<div style=\"padding: 56.25% 0 0 0; position: relative;\"><iframe style=\"position: absolute; top: 0; left: 0; width: 100%; height: 100%;\" title=\"When to set up an EMI option scheme\" src=\"https:\/\/player.vimeo.com\/video\/1146762252?badge=0&amp;autopause=0&amp;player_id=0&amp;app_id=58479\" frameborder=\"0\"><\/iframe><\/div>\n<p><script src=\"https:\/\/player.vimeo.com\/api\/player.js\"><\/script><\/p>\n<p>&nbsp;<\/p>\n<div class=\"row-fluid-wrapper row-depth-1 row-number-3 dnd-row\">\n<div class=\"row-fluid \">\n<div class=\"span12 widget-span widget-type-custom_widget dnd-module\" data-widget-type=\"custom_widget\" data-x=\"0\" data-w=\"12\">\n<div id=\"hs_cos_wrapper_kb-article-module-3\" class=\"hs_cos_wrapper hs_cos_wrapper_widget hs_cos_wrapper_type_module\" data-hs-cos-general-type=\"widget\" data-hs-cos-type=\"module\">\n<h3 data-section-id=\"1teumge\" data-start=\"153\" data-end=\"194\">Anti-dilution vs. non-dilution shares<\/h3>\n<p data-start=\"196\" data-end=\"306\"><strong data-start=\"196\" data-end=\"220\">Anti-dilution shares<\/strong> protect an investor if you raise at a lower valuation in the future (a \u201cdown round\u201d).<\/p>\n<ul>\n<li data-start=\"308\" data-end=\"471\">If your next funding round is at the same or a higher price per share, those shares behave like ordinary shares \u2014 the investor is diluted along with everyone else.<\/li>\n<li data-start=\"473\" data-end=\"694\">But if your next round is at a lower price per share than the one they invested in, you\u2019re agreeing to \u201ctop up\u201d their ownership to offset that drop. That top-up can significantly dilute founders and existing shareholders.<\/li>\n<\/ul>\n<p data-start=\"696\" data-end=\"889\">VCs will usually require preferred shares with anti-dilution protection. In US venture deals, this is standard \u2014 especially in priced rounds \u2014 and not something you\u2019re likely to negotiate away.<\/p>\n<p data-start=\"891\" data-end=\"1171\">With angel investors, it\u2019s different. Anti-dilution protection is less common at the earliest stages, and keeping your cap table simple is usually more attractive. In many cases, investors are more focused on upside (e.g., QSBS eligibility) than downside protection at this stage.<\/p>\n<h3 data-start=\"1178\" data-end=\"1248\"><strong data-start=\"1178\" data-end=\"1201\">Non-dilution shares<\/strong> are very different \u2014 and far more problematic.<\/h3>\n<p data-start=\"1250\" data-end=\"1315\">These are shares that don\u2019t get diluted in future funding rounds.<\/p>\n<p data-start=\"1317\" data-end=\"1529\">While that might sound appealing to an investor, it creates a structural issue: when new shares are issued, <strong data-start=\"1425\" data-end=\"1528\">everyone else is effectively giving up more equity to maintain that investor\u2019s ownership percentage<\/strong>.<\/p>\n<p data-start=\"1531\" data-end=\"1745\">That dynamic tends to create friction with future investors. If new investors know that part of their investment is effectively supporting someone else\u2019s guaranteed ownership, it can make the round harder to close.<\/p>\n<p data-start=\"1747\" data-end=\"1913\">For that reason, non-dilution provisions are extremely rare in venture-backed companies \u2014 and including them can make future fundraising significantly more difficult.<\/p>\n<p data-start=\"1915\" data-end=\"2228\">You might occasionally see requests for fixed ownership percentages in certain contexts (for example, from accelerators or university-affiliated spinouts). If that comes up, it\u2019s worth getting advice before agreeing to anything \u2014 these terms can have long-term implications for your cap table and investor appeal.<\/p>\n<h3 data-section-id=\"1jyn6ub\" data-start=\"2235\" data-end=\"2265\">A note on tax context (US)<\/h3>\n<p data-start=\"2267\" data-end=\"2438\">In the US, tax incentives like <strong data-start=\"2298\" data-end=\"2339\">QSBS (Qualified Small Business Stock)<\/strong> often play a bigger role in investor decision-making than downside protections like anti-dilution.<\/p>\n<p data-start=\"2440\" data-end=\"2602\">That\u2019s one reason why early-stage rounds tend to prioritise simplicity and upside \u2014 rather than adding complex protections that can complicate future fundraising.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n"},{"acf_fc_layout":"form","layout":"custom","heading":"Get answers fast, for free","content":"Bring all your questions - we\u2019ve got the answers!\r\nWe\u2019ll match you with the right specialist.","custom":{"image":false,"button_text":"Get Started","form":{"type":"hubspot","hubspot_form":{"layout":"default","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"21723609-6f1b-45c0-9691-77d462dc3bed","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. 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